Jankovsky, Trading Rules That Work

Commenting on my July 11 review of Jankovsky’s The Art of the Trade, Jorge mentioned another Jankovsky book, Trading Rules That Work: The 28 Essential Lessons Every Trader Must Master (Wiley, 2007), that he found “a much better book.” I’ve finally gotten around to seconding his opinion.

On the surface this book might appear elementary and unoriginal. There’s no dearth of lists of trading rules, and many of Jankovsky’s rules are among the most popular—for instance, have a trading plan and define your risk. But the problem with lists of trading rules is precisely that they’re, well, lists. No one can expect them to answer “how” questions (how to write a trading plan, how to define risk)—that’s the decision of each individual trader. But when they become simply a trader’s catechism, they have limited value. Learning the trader’s catechism no more propels a person toward wealth than learning a religious catechism propels a person toward sainthood. Memorization isn’t comprehension. (And, of course, comprehension is at best only a first step.)

Fortunately, Jankovsky provides an organizing market principle for these rules—order flow. He argues that “your entire analysis and trade plan must take into consideration some way to identify where the order flow is and what to do if you are on the wrong side of it.” (p. 6) Moreover, the trader not only has to identify the order flow for his own personal time frame but also has to consider “what the traders with other time frames might be seeing, because at some point, when those other time frames are drawn in, their orders . . . will either add to the net order flow that is developing in one direction or it will overwhelm the net order flow from the other side, stopping the imbalance and the price advance.” (p. 74)

By always thinking in terms of order flow the trader can be proactive in his trade management. He can, for instance, set multiple profit objectives. Jankovsky outlines how he personally sets objectives. “The first objective is the area where I feel the market will have a pause, and a larger time frame trader must make a decision. . . . the first objective is not just price; it is time and price. I want to see the higher-time-frame trader push my trade with his order flow.” (p. 79) The second objective is the frequently touted 3:1 reward:risk ratio. If the trade reaches that price, Jankovsky then assesses whether the trade has any more potential. In his assessment he relies heavily on how long it took price to reach his target and whether volume and open interest are increasing as price remains at or close to the second objective. The third objective is “usually a price area where the larger time frames take a stand from the other direction.” (p. 79)

Trading Rules That Work is a very good book for the novice trader, but it probably has even more value for the trader with some experience.